Optus ramps up bid for dominance

Optus is preparing to double its spending to $2 billion over the next two years as it launches an offensive in the 4G arms race and aims to build a network that will catapult it ahead of
Telstra
for the first time.

The No. 2 carrier plans to leverage its recently completed infrastructure sharing arrangement with Vodafone and its $230 million purchase of Perth-based wireless broadband operator vividwireless to build a network it believes will be capable of superior speeds and in-building coverage than Telstra.

The huge increase in spending was recently approved by the board of Optus’s parent company,
Singapore Telecommunications
, highlighting the ongoing importance of the Australian consumer business in the group’s broader strategy following a recent restructuring.

“Optus’s purchase of vividwireless is an important first step in our aim to deliver the best performing network in Australia. And we have the [SingTel] board’s backing for that," SingTel’s country chief for Australia,
Paul O’Sullivan,
told The Australian Financial Review.

Central to Optus’s plan will be its 4G network, currently activated in Newcastle, with plans for it to be extended to Sydney, Melbourne and Perth in coming weeks.

4G or LTE (long-term evolution) is a technology capable of delivering speeds over mobile devices previously only available on a fixed-line connection, making it easier to consume video content and operate highly bandwidth-intensive applications.

Huge sums are being spent on the technology, with carriers seeing an opportunity to capture an increased slice of consumer dollars and reverse leakage of traditional revenue streams to the likes of Apple and Google. There are also significant cost advantages associated with the technology.

Telstra has first-mover advantage, having already upgraded 1000 base stations around the country, with its network available in all mainland capital cities and covering about 40 per cent of the population. The telco has made its superior network a key selling point, enabling it to charge higher prices to its customers. Telstra has also used 4G to cement its dominance in mobile broadband, an increasingly lucrative market with a growing number of wireless-only households.

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According to recent analysis by CLSA analyst Digby Gilmour, Telstra has about a 42 per cent share of the mobile market, followed by Optus with 34 per cent and Vodafone with 24 per cent. But Telstra’s dominance in mobile broadband is more pronounced, with the telco controlling more than 50 per cent of the market.

Optus is catching up, and is also in the process of refarming spectrum in the 900MHz band into 3G, which will become the workhorse of its mobile network. Last week, the carrier completed its purchase of vividwireless from Kerry Stokes’ Seven Group Holdings, gaining critical spectrum for its 4G assault.

Optus will incorporate the spectrum in the 2.3 GHz band using TDD (time-division duplexing) technology while spectrum from its 1.8GHz band will operate using FDD (frequency division duplexing) technology. Chinese equipment maker Huawei was considered the strong favourite to win a $1 billion super tender to upgrade thousands of base stations and sites around the country. Huawei pioneered the world’s first hybrid 4G network using TDD/FDD in Poland, has a 60 per cent share of TDD networks globally, and was believed to offer the most attractive pricing. But Optus is mindful of protecting multimillion dollar contracts with arms of the government, including with the Department of Immigration and the Australian Tax Office. Huawei has been blocked by the Gillard government from tendering into the $36 billion national broadband network, based on the advice of intelligence agencies. It has not been completely ruled out but is facing intense competition from other vendors including Alcatel-Lucent, Nokia Siemens Networks and Ericsson, whose role in Telstra’s 4G rollout may see it excluded.

Optus’ network upgrades form a key pillar of recently appointed consumer chief Kevin Russell’s plans to maintain earnings growth. Under Mr Russell, Optus is expected to focus on improving margins and lifting average revenues per user, rather than simply winning market share.